The data roaming rip-off

John Addis

You know how it works: land in a foreign country, clear immigration and hop in a bus to the resort. Minutes later, your phone bleeps. Telstra. A polite reminder that you'll soon exceed your roaming data allowance.

But you're on holiday, so you text a picture of a coconut palm to Simmo and update your Facebook status to single. Can't hurt can it?

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The data roaming telco rip-off is blatant and brutal. How can a megabyte of data be 1000 times more expensive when you're overseas? For once, economics has an answer.

Spend enough time with an economist and they'll eventually get to the fable of two ice-cream sellers on the beach:

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It's a hot day, the beach is packed and there's money to be made. Both do what's sensible. Charging the same price for the same product, they move to opposite ends of the beach, carving the market up between them.

Then one of the vendors realises that moving 40 metres towards the middle of the beach will snare him more customers. Of course, his competition notices, and responds. But instead of moving 40 metres he moves 60, returning the favour with interest. Before you know it, our ice-cream sellers are next-door neighbours.

If you've wondered why a Domino's outlet opens up next to a Pizza Hut, or cafes bunch around a strip, you've witnessed Hotelling's law, or the principle of minimum differentiation, in action.

The data roaming rip-off is a variation on this theme. The telcos claim that your data costs are ludicrous because theirs are, too. Foreign carriers rip them off so they have to do the same to you.

This is superficially correct and substantively rubbish. At some stage in the past, a telco moved its data roaming pricing up the beach and everyone else followed. Just about every dominant telco now charges silly prices for data roaming.

In a traditional cartel, prices are fixed around a table. In the great telco data roaming rip-off, they're set by contracts – data roaming agreements. In effect, both parties agree to rip off each other's customers.

Conventional economic theory suggests a smart operator seeing monopoly profits will come in and undercut these huge fees. But that's the beauty of it; it's all very well taking on one company, but a global industry?

So the customer gets stiffed. And knowing the carriers all charge more or less the same, why bother changing?

The clever part is in the way the system offers a convenient excuse to every carrier for the extortionate charges, allowing them all to make out like bandits at your expense.

Communications Minister Stephen Conroy has called these charges "frankly obscene" but the changes he's introduced rely on a market mechanism to fix market failure.

Under the new arrangements, you get a text notifying you how much you're being ripped off. Yeah, that'll fix it.

These notifications reduce the likelihood of your telco wiping out your debt when you call to complain because they remove the argument that you didn't know how much you were being charged.

A report by the Organisation for Economic Co-operation and Development in 2011 found Australia's international data roaming charges, at about $12 a megabyte, to be the third highest in the world, behind Japan's and Chile's. European Union citizens pay only $2 to $3 a megabyte.

What explains the difference?

Unlike Stephen Conroy, the EU took the only appropriate response to market failure of this sort: it regulated data roaming charges in 2007 and forced them lower again last year.

Until we get similar legislation with neighbouring countries, bill shock will continue to afflict returning travellers, as will offers to wash David Thodey's smalls.

This article contains general investment advice only (under AFSL 282288).

John Addis is a director at Intelligent Investor. BusinessDay readers can enjoy a free trial offer to Intelligent Investor Share Advisor, including access to 16 current "buy" recommendations. For more Intelligent Investor articles click here.